Malaysian High Debt Ratio

Lower income households in Malaysia borrow seven times more than their annual income, on average, and are not financially resilient, said Khazanah Research Institute (KRI) in its publication, The State of Households II.

“While household balance sheets look healthy at the aggregate level, households in different income classes face different financial risks. Households in the lower income brackets have much higher leverage (debt-to-income) ratios compared to those in higher income brackets,” it said in its report, which was launched on Monday.

Data from Bank Negara Malaysia (BNM) shows that households earning less than RM3,000 a month have a relatively low share of total household debt at 22.6% in 2015. However, these households have a leverage ratio of seven times their annual income, on average, compared with an average leverage ratio of three times for households with higher income.

More than 50% of the enrolments in the Debt Management Programme set up by the Credit Counselling and Debt Management Agency, comprise borrowers earning less than RM3,000 per month.

The central bank also reported higher delinquencies for compact car hire purchase and personal financing loans, suggesting that leveraged households in the lower income bracket face more financial difficulties compared with their higher income counterparts.

“A study of the financial fragility of urban households found that only 10.8% of these households were resilient to financial shocks caused by factors such as unemployment, physical impairment, death, divorce and changes in interest rates or financial markets,” said KRI.

In addition, more than one-fifth of these households would only be able to survive for less than three months if their incomes were cut off. Overall, more than half the households surveyed did not have any savings.

Meanwhile, household savings are low, at an average of 1.4% of adjusted disposable income in 2013 and averaged at 1.6% for 2006-2013, according to Department of Statistics (DoS) data.
KRI also examined savings in the Employees Provident Fund (EPF) and investment in Amanah Saham Bumiputera (ASB), which indicate that inequality in wealth is much higher than inequality in household income.

As at December 2015, 91% of active EPF members earned less than RM6,000 a month, 83% earned less than RM4,000 while 58% earned less than RM2,000.

“Many members are not meeting their basic savings requirements due to the fact that they earn little. About three out of four EPF members (76%) earn less than RM3,000 per month, and nearly 90% earn less than RM5,000 per month,” it said.

As at February 2016, the savings of the top 20,867 (0.3%) EPF members are greater than the total savings of the entire bottom 47%, which comprises 3,117,610 members.

In 2014, active EPF members in the 51-55 age group, who are on the brink of retirement and would have their careers’ worth of savings, had on average RM159,952 each. Excluding the richest 1.6% who have an average of RM1.6 million in savings, the average savings for this age group was lower at RM137,605.

“However, the bottom 13.5% has average savings of only RM5,621 and the next 6.5%, an average of RM9,585. In other words, about one in five members nearing retirement has less than RM10,000 in savings,” said KRI.

For ASB, the distribution remains skewed although the average investment increased from RM14,096 in 2012 to RM15,928 in 2014.

In 2012, the bottom 73.7% of unit holders of ASB had an average savings of RM611 in their accounts. By 2014, the average savings for the bottom 71.5% of unit holders had fallen to RM536. In 2014, the savings of the bottom 71.5% constituted a meagre 2.4% of total savings.


KRI managing director Datuk Charon Mokhzani who presented the report on Monday, highlighted the question of whether Malaysia needs a consumer credit act to prevent people from borrowing too much